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Steel Maker Considers Debut Rate Swap To Fortify Books

Nucor Corp., a steel producer with some USD4 billion in annual revenue, is considering entering its first interest rate swap. Jim Frias, corporate controller in Charlotte, N.C., said he is contemplating entering a swap to take on a floating-rate liability and lower the ratio of fixed-rate debt on its balance sheet. Of the company's almost USD900 million in total debt, 67% is in fixed-rate obligations. "We have a big ratio of fixed right now and we think long-term variable rates will be a bit lower-cost," he said, declining to provide a target ratio.

Nucor is considering entering its debut swap now because of the increased debt burden it took on last month through issuing a USD300 million bond. Frias said the company does not plan to enter any swaps to convert that debt into a synthetic floater, as he said the funding is good value for a 10-year deal. The bond priced at 4.875%. "We're not intending to do any swaps on this because we think the rate is too good to change," he said.

However, Frias noted Nucor has off-the-run paper and it is more likely to enter swaps based on these, such as a 10-year deal maturing in 2009. That bond carries a 6% coupon, and by entering a swap now he said Nucor could take on floating-rate exposure and lower a coupon that is high by today's standards. This deal would be the most likely candidate for a swap. Another incentive for Nucor to use interest-rate derivatives is that by carrying the strongest credit rating in the U.S. steel producing industry, Nucor can achieve attractive pricing. He declined comment on potential counterparties. Banc of America Securities and Wachovia Securities underwrote the steel producer's recent bond sale.

Moody's Investors Service rates Nucor A1 and Standard & Poor's rates it A plus.

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